Category: FinTech

Interaction with the environment is an essential ingredient to success in the mesh economy of the age of information. Many companies seem to struggle with this as they cannot let the past go. The legacy defines what is possible and also what success means. The activities are inside out oriented dominated by the inherent constraints.

One reason might be that many organizations have lost the sovereignty to move forward. For quite some time organizations were optimized by means of business process outsourcing. Near and offshoring, it was believed, would bring efficiency. That was maybe true in the age of industrialization. But it is not true anymore in the age of the information where lean and agile structures, skills and technology make the difference while repetitive tasks are automated. The approach may have provided a bit of short-term profit polishing but unfortunately resulted in a longer term strategic disadvantage as skills and know-how moved to the sourcing partner.

Another reason might be the way how business cases are used today. Any change requires a business case. This was relative simple in the slow changing age of individualization and also works well for small changes today. It does not work well in the world of VUCA.

In addition the dynamics in organizations do not help with the approach. The own business case has to be better than most other cases to have a chance in the internal competition for funding, so it will be optimized a bit. Since everyone knows that, all the cases are being tuned. The management sees the number of excellent business cases a a luxury problem – it feels good to have such choice.

On the flip side the decision process gets difficult and tedious. During all these processes and procedures, a lot of time passes by. At the point when decisions are finally made the environmental conditions have changed, and everything should actually start again. But that would be too painful, so the execution of the initiatives starts anyway. At some point after the project start, management realizes that the projects are a little off the mark, then the organization re-prioritizes and the internal bureaucracy starts again. Then also the ego of the typical manager starts to amplify the effects – a great manager cannot have done anything wrong, which brings the whole theater to the next round.

Bigger changes are hard to get through – the assumptions feel less intuitive and the risks are perceived to be higher. Hence the small incremental changes are preferred and the core fundamental ones continuously push down in priority. The company change capacity slows down and the cultural legacy is soon be joined by technical legacy. Some people like this stage as it offers the opportunity to launch simplification programs, which of course suffer from the same effects as all other projects.

I think there is only one way to resolve such a situation – push ‘refresh’. Rethink the business model and decompose the organization into self sufficient units. Give them the competence to decide and also the responsibility to deal with outcomes.

And this leads to the most challenging point – the time “where the turkeys are asked to vote for Christmas” and to disrupt themselves.

Services offered by banks are mainly commodities sold with rather opaque pricing strategy. Client experience has become the main differentiator as underlying services are largely the same. The challenge has become creating outcomes which integrate into the life of the customer via respective touchpoints of the client’s eco system. This becomes difficult as the number of potential touchpoints increases significantly (ubiquitous computing).

The focus within banks has moved from operations and backend infrastructure to the touchpoints. Such focus leads to the shift in investments – which leave the backends under-invested hidden from the user by layers of newer systems. This trend started years back when the financial services industry realized that the internet is not a transient effect and changed the way business is fundamentally done. The adoption accelerated with the rise of mobile and the next catalyst with the increase usage of conversational technologies like chat or voice.

Adding more layers does not improve the overall system – instead only to delay and cover up the increasing issues and complexities of the fragile legacy backend which can no longer be sustainable (Measuring complexity in networks). From an opertional perspective the whole architecture becomes more and more unmanagable and risky highlighting the need for a substantial refactoring or more likely a total re-architecting.
Let’s for the moment assume that you own such a “backend” which becomes increasingly hard to change and difficult to operate. What could be a way out of this situation?

Be bold and start greenfield. This allows to get rid of the layers of legacy and build a system which matches current needs.

Try to be clever and refactor the system in an incremental approach. You have to be faster then the changes in the environment as you have to catch up and eliminate debts while adding the functions required to stay competitive. Implementation risk and sunk cost avoidance are the typical arguments backing this option.

Most organizations will go for the second option and try hard. They neither have strong leadership and capability(s) to aim for the first option nor the skills to actually build something new based on current state practices. The organization and the management are only trained to do small changes and the “internal immune system” reacts immediatly against any major change which could endanger the status quo.

Maybe it is better to start with a canary banking approach – where the next version of the bank is built up while the first is operational.

It is similar to driving a car – you choose one, drive it, maintain it and at some point you switch to another model. The new model may contain some parts already used before – that’s fine as long as they fit into the new model. The approach is rather different than continuously adding/ changing external cosmetics elements to an outdated Ford-T backend.

There is an intense ongoing debate about the pros and cons of PSD2 in media. On one side some feel that the financial sector is already heavily regulated and with any additional regulation,like PSD2, it will hinder the free evolution of markets. Others on the other hand think that PSD2 is good, as it allows fintechs and bigtech to access client account and transaction data as the catalyst ti add-on services and provide superior user experience. The client owns the decison power and the incumbents are mandated to collaborate. The incumbents may actually get the biggest value from PSD2. Sounds counterintuitive so lets explore a few thoughts.

There is a general set of ongoing trends – the age of industrialization has been superseeded by the age of information. Thus the pipeline businesses which domintated during industralization are being superseded by the platform business models. The platform models are superior as they take advantage of the benefits of network effects. They leverage ideally through similar advantages of the internet. Platform business models are typically composed of many smaller organizations grouped together via the platform into a structure much more powerful than the sum of their parts. Successful platforms create a pull effect as each participant increases the value of the platform for all.

Banking is not yet a platform business – many talk about the uberization of banking and I am convinced it will happen. Typically a very small number of big players will dominate a specific sector in a platform economy These are companies that successfully establish the pull effect described above. When banking moves into such a model, the only players are ones which can integrate seamlessly, offer highly competive services or the one which owns the platform and masters the integration and collaboration. All successfull entities must be well connected and are experts in the interaction and integration through API’s.

Todays incumbents today are often the opposite – they operate in a closed and private environment and try to create captive businesses individually. They interact with very selective partner(s) and does not empower their clients to make their own choices l. They also typically create specific standards and make it very difficult for others to interact with the large number of incumbents.

This is where PSD2 changes the game – it forces the incumbents to think about interfaces and forces them to open up. This is a threat as business(s) may be lost but it brings to the attention of incumbents wanting to change, a survival training in the world of VUCA (Dance on the VUCAno). This forces companies to participate in the mesh economy and its dynamics. It increases the chance to become robust enough to delay the time when the tech giants might take over (Next stop fintech giants). It may well be that a fair amount of revenues of incumbents get eroded during this process and that more client touch points are lost to competitors who just create better client outcomes and experience. But it also strengthens the companies in the upcoming big tech challenge.

This leads to a key question: Should other regulators follow the EU and mandate a regulation like PSD2 and GDPR in order to strengthen the financial system by exposing the incumbents to a shock to increase anti-fragility (In a world of VUCA seek anti fragility) or should it leave the choice to the incumbents which may prefer to protect what they once had and then experience at one point their Kodak moment with potential disastrous impact on the sector and economy?

Under the context of digital offering(s) is its simplicity of a single-purpose business model/ offering/ app the wave of the future?

WeChat, or Weixin in Mandarin, is quickly becoming one of the most popular multi-purpose platforms, not just in China, but the world. Released in 2011 by Chinese internet giant Tencent, With nearly 800 million active monthly users, its user base has grown consistently in every single quarter to date. More importantly the point that I would like to focus is it’s actual embodiment of the app.

It’s safe to say that the most ardent of technophiles have at least 100 apps on their smartphone e.g. Facebook Messenger, WhatsApp, Telegram, Skype, Google Hangouts and Duo for instant messaging. Uber, Lyft, Citymapper, Waze, Tripadvisor, AirBnB and Skyscanner for directions/maps. In addition for gastronomy related: Deliveroo, Just Eat, OpenTable, Zomato, Yelp or Urbanspoon. That’s 19 apps to cover three essential functions. WeChat includes capabilities above and more.

WeChat lets users do everything you’d expect it to – instant messaging, sharing life events and chatting to family members. But its feature list extends far beyond custom emojis and profile pictures. WeChat allows you to arrange a catch-up with a friend, pre-order food from a restaurant, book a taxi to the restaurant, get directions on foot, pay for the meal (or split amongst your friends at the time of payment), check movie times and book tickets, and also purchase other items. All without hitting the home button.

The possibilities for brand-to-consumer engagement on WeChat are almost unparalleled anywhere else in the world, and this is almost entirely due to the way the app manifests itself in as many aspects of daily life as possible. By knowing a person’s current location and when they usually have dinner, all in one app, fast-food brands can hyper-accurately target consumers when they’re most inclined to purchase. And by tapping into the app’s data on payments and money transfers, marketers can get a good idea of when, where, how and why users spend their money, before using this to hyper-accurately target their audience when they’re most likely to buy. With such understanding of a client’s behaviour enables to proactively provide financial wealth services be it from suggesting dynamic relevant payment methods to making recommended investments, wealth management and advisory, etc…

The need for banks to traverse beyond its current boundary is imperative to regain expediency with the new paradigms ( see Digital Tur Tur).

The notion of VUCA was introduced by the U.S. Army War College to describe a volatile, uncertain, complex and ambiguous multilateral world which resulted after the end of the Cold War. This applies well to the world we see today where a lot of things evolve in parallel influencing each other. VUCA stands for:

Volatility – fast rate of change

Uncertainty – as things change fast we seem to live in a world of uncertainty

People like stability and simple situations – but in reality is different. The elements of VUCA can be seen as a threat or an opportunity. I prefer the opportunistic view with observable developments within each elements of VUCA

Volatility – opportunity for those who can adapt, are agile and have access to resources

Uncertainty – opportunity for those who look at the bigger picture

Complexity – opportunity for those who can adapt and influence

Ambiguity – opportunity for those who live and breath diversity

Here are some thoughts triggered by VUCA

Having a vision or a longer term purpose is key to channeling activities towards a common goal. It enables all to make the right decisions at any time (giving direction)

Projects or initiatives must be structured as small steps each leading to a stable and beneficial state.

Approaches may look promising upfront but may become unattractive or even unpractical when being implemented. It s key to acknowledge, learn and move on (never fail to fail).

Try to travel light – adjusting direction and acting quickly does not work when we have lots of baggage.

Avoiding technical and business debt becomes instrumental in enabling the ability to renew systems and organizations.

Old patterns and theories become stumbling blocks. Be creative and innovative to develop patterns and tools which match the new reality.

Best practices are good to learn. They are for a specific situation – yours is different.

We live in a world of networks and network effects matter. Its about connections and influence not about hierarchy.

If one acts to isolated he loses influence which lacks the stimuli and interactions in order to drive innovation and creativity.

Try new things if you expect something new. Be curious and open for surprises – there is always something positive in it which can be used to build on.

In the world of ambiguity it may sound promising to try to keep and defend one’s current strong position. Why try to be creative and innovate? Why not just wait, optimize the current state and buy what turns out to be a success. This does not work well in a networked world. Such strategy typically leads to a limited time success followed by a serious threat.

Not so long ago we introduced banking capabilities (see “Towards a digital barter economy?”). Then came the pursuit of product offerings from basic to highly exotic types. With globalisation and increasing market competitiveness banking institutions must now drive innovativeness in their operation to gain sustainable competitive advantage. We are now in an era of competing, not only with incumbents but new challengers outside the financial sector, on the basis of services rather than on the basis of physical products as it is hard to distinguish between products of competing brands in a given product category. It is the services offered by the banks that manifest true value. Differentiation in services must be based on the need to have a vision (see “Giving Direction“) … and not ‘just’ innovation but with the sense of purpose.

Service innovation involves intangible resources for a more innovative service(s) that challenges the conventional attribute-based view of services delivery designs. This requires going beyond current restrictions of product innovativeness that involves assimilation of improved service processes by means of designing and redesigning service delivery capabilities. The pervasive influence of information and communication technology has revolutionised the means of social interaction which will impact how banks will integrate in the client’s ecosystem.

As services become more important for society and customer’s demand more complex and personalized solutions the need to understand and build up innovative processes is vital. Globalisation, information on demand, and ubiquitous communications are pushing innovative services to become more open, flexible, integrated, complex, multi-actor, and networked-oriented).

“Six Dimensional Service Innovation Model by den Hertog, van der Aa and de Jing (2010)” – this defines services innovation as a new service experience or service solution that consist of one of the following six dimensions: new service concept, new customer interaction, new value system, new revenue model, new delivery system and technological.

Can banks use these models as a baseline to evolve future service innovation models?

Nevertheless we need to work towards sustainability competitive advantage and embracing service innovation as an integral part of the bank’s strategy in order to move continuously towards being customer-centric and services-centric. Although there will still be a wave of financial product innovation based on programmable money we should not be limited to product and/or related process innovations but we must emphasise on business model innovation, market innovation, and most importantly paradigmatic innovations.

All three aspects levitates a shift towards a distributed decentralized financial system. This affects the core and challenges legacy status quo and its existence in the future.

In addition fueled by the increasing tokenization and availability of blockchain based systems there will be a shift towards

Mobile Payments

Holistic mobile wallets

Global Solutions

There will be no other options for incumbents to integrate into the evolving mesh than to provide API’s to access information and services and to start to rely on others to provide crucial information. Self contained and closed financial services companies as well as local solutions will increasingly face headwinds.

Open Banking / API’s

Global solutions

Last but not least – user interfaces will become much more natural and transparent. The users will be amplified with new sense and access to information supported by intelligent agents.

Regulators will start to come up to speed with the changes. They will find ways to agree with business changes but also ethical standards across borders acknowledging the global nature of digital eco systems. A big challenge will be on the very old tax systems which are not ready yet for the shaping economy.

Tax System

These changes are fundamental – there is a ongoing paradigm change where inherent distributed digital approaches start to outperform the automated legacy processes. There are two big dangers out there

Many of the current developments seem to turn time back and bring up systems again which were used in the past but difficult to apply as physical distance was a limiting factor. Digital changes this – the world becomes some sort of a global village. Have a look at Yap, The Island Of Stone Money – the first productive blockchain system.